What are priority shares or golden stocks?
In principle, all shareholders of a company are equal. For example, they all have the right to the same dividend and can vote. However, it is possible that one shareholder has more rights than other shareholders. One type of shares that makes this possible is the priority share. The holder of priority shares has veto power over certain decisions.
- Priority stocks give the holder certain veto rights
- Priority shares are also known as golden shares in foreign countries
- The holder possesses at least 51% of the voting rights
A priority stock is a share that gives the owner more control. The owner of a priority share has more rights than a normal shareholder. However, the extra rights are limited to the control of the company. The holder of this type of share does not receive more financial benefits than normal shareholders.
So, a priority share is a share that comes with extra rights. But what are some examples of the extra control rights you have as a holder of priority shares?
Below you can find examples of what a priority share can give you as extra control rights. The specific rights of a particular priority share differ from situation to situation. Sometimes, with a priority share, you can:
- Make decisions about new or existing directors.
- Make decisions about the future of the company.
- Veto decisions made within the company.
- Change the company’s articles of association.
- Sell parts of the company.
Compared to ordinary shareholders, holders of priority shares have a more favourable position since they can influence the course of the company.
Priority shares are often issued to the founders of the company so they can maintain control. Through priority shares, they can determine the direction of the company.
The presence of priority shares can lower the stock price. Shareholders know that they have less influence, which makes a normal share less valuable.
The extra control that a priority share brings offers a certain form of protection.
Protection against hostile takeovers: Let’s say there is a possibility of a hostile takeover. If the takeover succeeds, the party that takes over the organization cannot decide on matters where the shareholders with priority shares have an extra right. This makes it less attractive to buy the other stocks and reduces the chance of a takeover.
Protection against adverse decisions: Priority shares also offer protection to those who own these stocks. If they do not agree with a certain decision, they can block it with their special rights to prevent decisions that influence them negatively.
In addition to priority shares, there are also preference shares. Shareholders with these shares also have a slightly higher position than the other shareholders of an organization. They receive a fixed return on their stocks that is not linked to the company’s results. The return on preference shares is always paid out before the return on the normal shares, or the shares of the other shareholders.
Preference shares offer financial advantage, priority shares offer more control. The two shares have different advantages, but have one thing in common: both types of shares give the shareholder a more favourable position compared to the normal shareholders.
A golden share is fairly similar to a priority share, but there are some differences.
A golden share is a type of share that gives the shareholder at least 51% of the voting rights. These shares are used in some state-owned companies in England and Brazil. However, golden shares are not allowed in the European Union, as they give too much power to one party.
Golden shares can be beneficial in some cases, for example for companies that have a crucial role in the economy. With a golden share, the government can ensure that the company continues to perform these tasks well.
